Sierra Bancorp — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Sierra Bancorp is a California bank holding company; its subsidiary, Bank of the Sierra, operates across several California regions. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $28.9 | $26.7 | $80.3 | $82.5 |
| Net interest margin | 3.63% | 3.46% | 3.41% | 3.66% |
| Provision for loan and lease credit losses | $1.2 expense | $0.6 benefit | $4.4 expense | $2.5 benefit |
| Noninterest income | $6.6 | $7.5 | $23.1 | $21.0 |
| Noninterest expense | $21.0 | $20.9 | $63.3 | $61.4 |
| Net income | $9.9 | $10.6 | $26.5 | $33.4 |
| Diluted earnings per share | $0.66 | $0.69 | $1.76 | $2.17 |
- Q3 annualized return on average assets was 1.13% and return on average equity was 12.84%, versus 1.26% and 11.62%, respectively, in Q3 2021. For the first nine months, ROAA was 1.03% and ROAE 10.98%, compared with 1.36% and 12.60%.
- At September 30, total assets were $3.532 billion, up 5% from year-end 2021. Gross loans were $2.020 billion, up 2%; deposits were $2.885 billion, up 4%.
- Cash and cash equivalents were $86.7 million, down from $257.5 million at December 31, 2021. Investment securities totaled $1.226 billion, including $1.069 billion available-for-sale and $156.2 million held-to-maturity.
- Shareholders’ equity was $295.1 million, down from $362.5 million at year-end. Accumulated other comprehensive loss was $61.0 million, primarily reflecting securities fair-value declines.
- Interest-bearing debt and funding included $112.0 million of repurchase agreements, $103.1 million of short-term borrowings, $49.2 million of long-term debt and $35.4 million of subordinated debentures.
- Nine-month cash flows: operating activities provided $33.4 million, investing activities used $400.9 million, and financing activities provided $196.6 million. Cash and cash equivalents decreased $170.8 million.
Changes versus comparable periods
- Q3 net interest income rose 8%, supported by a 17-basis-point improvement in net interest margin and higher average earning assets. However, higher deposit and borrowing costs partly offset improved asset yields.
- Nine-month net income fell 20%. Net interest income declined 3%, while credit-loss provisions rose substantially compared with the prior-year benefit; noninterest income increased 10%.
- Higher rates contributed to a marked rise in funding costs: Q3 interest expense was $3.0 million versus $0.9 million, and nine-month expense was $6.0 million versus $2.7 million.
- Nonperforming loans increased to $26.8 million, or 1.33% of gross loans, from $4.5 million and 0.23% at year-end 2021. The increase chiefly involved a dairy borrower relationship recorded in the first quarter.
- The company adopted CECL on January 1, 2022. Adoption increased the loan allowance by $9.5 million and the unfunded-commitment allowance by $0.9 million; the after-tax retained-earnings adjustment was $7.3 million. Prior-year credit-loss comparisons use the former incurred-loss method.
Liquidity, credit, capital and notable items
- Liquidity: Management reported primary and secondary liquidity sources of $2.226 billion, including $86.7 million cash, $1.041 billion of unpledged securities and borrowing capacity. The primary liquidity ratio was 39.12% and net loans to deposits 70.01%; management said these exceeded internal thresholds.
- Credit quality: The allowance for loan and lease losses was $23.8 million, or 1.18% of gross loans, versus 0.72% at year-end 2021. Nine-month net charge-offs were $4.3 million. A separate $0.9 million allowance covered unfunded commitments. Management attributed the Q3 allowance increase mainly to a larger reserve on one collateral-dependent loan relationship.
- Securities and equity: Available-for-sale securities had $75.9 million of gross unrealized losses at September 30, which management attributed primarily to market interest-rate movements rather than credit deterioration. On April 1, $162.1 million of securities were transferred from available-for-sale to held-to-maturity. A further $198.3 million transfer occurred effective October 1, after quarter-end, to reduce the effect of rate changes on reported OCI and equity.
- Capital: The Bank’s leverage ratio was 11.54% and Sierra Bancorp’s was 10.45% at September 30. The Bank’s ratio exceeded the 9% community-bank leverage threshold described in the filing. The company repurchased $4.9 million of shares and paid $10.4 million of dividends during the first nine months. A new plan approved October 20 authorizes repurchases of up to 630,000 shares through October 31, 2023.
- Nonrecurring and operational items: Nine-month noninterest income included a $1.0 million securities gain, a $2.6 million gain on sale of Visa B stock, a $0.6 million gain on a small-business investment fund, a $1.0 million recovery of prior-year legal expenses, and other items. The company also recorded $0.7 million of customer restitution related to past nonsufficient-funds fees. It ended NSF fees in Q3 and changed overdraft-fee limits.
- Outlook and risks: The filing gives no specific earnings or revenue guidance. Management described the company as asset-sensitive in modeled rising-rate scenarios, but warned that falling rates could reduce net interest income and economic value of equity; modeled downside sensitivities exceeded internal guidelines in some scenarios. Principal risks include interest-rate and inflation changes, deposit outflows and funding costs, loan losses, securities valuation, local economic conditions, and liquidity needs. Management reported no legal matters expected to have a material effect, while noting an adverse outcome could be material.
Most important facts for investors to verify
- Whether the elevated nonperforming-loan balance and collateral values—especially the dairy relationship—lead to further provisions or charge-offs.
- How deposit pricing, borrowed-fund usage and asset repricing affect future net interest margin as rates change.
- The realized or accounting impact of the securities portfolio’s unrealized losses and the October transfer to held-to-maturity classification.
- Whether deposit growth and reported liquidity capacity persist, including the behavior of potentially rate-sensitive or wholesale funding.
- How recurring earnings compare with reported results after excluding securities gains, asset-sale gains, legal recoveries and other unusual items.
- The filing reports strong liquidity and capital measures, but interim results are not necessarily indicative of full-year performance.